Thursday, 15 May 2008

An Investing Lesson from Greek Mythology

There is one ancient Greeks myth that we investors would do well to heed even today thousands of years later. Like Odysseus, we must resist the seductive songs of the investment Sirens luring us to financial destruction.

A case in point is mutual funds. Many times has the disappointing truth been told that most mutual funds' investment returns are worse than their reference index. Worse, far worse in fact, than this are the investment returns of the actual investors in mutual funds. Vanguard fund founder John Bogle recently wrote in his Bogle's Corner May/June issue (thanks to the Bylo where I found this link) of evidence of shocking under-performance of investors in a group of 200 US mutual funds.
"... the 200 funds with the largest cash inflows during the five-year period 1996–2000—essentially the duration of the late, great bull market—reported an average return of 8.9 percent for the 10 years from 1996 to 2005. But the dollar-weighted return of those 200 funds— the return actually earned by their shareholders—was just 2.4 percent, only 25 percent of the annual returns reported by the funds themselves."
After inflation and taxes, that wouldn't be much!

To continue the analogy, the Siren song was the advertising of the mutual fund companies touting their recent past investment performance. Sadly, the cash inflows are evidence that the investing public listened. (Others call this chasing returns but I like the Greek analogy.)

The way to resist is to do as Odysseus instructed his sailors - build a plan, stick some wax in the ear and don't deviate when the temptation is strongest.


Anonymous said...

Interesting post. :) I myself love Greek Mythology. Specially about the Trojan war & about the Titans & gods.

CanadianInvestor said...

I'm sure someone else has done it but it struck me as I was writing the post that there could be a whole series of investing lessons based on fables and mythology.

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